October 15, 1998
 G100
 Kleit Oligopoly Simulation notes

    Our exercise in class  was meant to illustrate a number of problems firms 
face in choosing how to  market their products.  I asked you to think about how 
the numbers worked out.  We'll discuss this again next week briefly,  after the 
midterm, but I thought a few note might be helpful.

 1.  When there are 42 firms in the marketplace, no one firm's choices make much 
difference, though all 42 decisions together do. When the price was 38, if one 
of you had switched to 150 local sales from 0,it would not have driven down the 
price much.  150/42 is about 3, so  you would have increased your profits 
dramatically, given that the national price was only 20.  If  all the firms had 
done that though, the price would have fallen to 0 as the market was glutted. 

 2.  It is very hard to  get 42  firms to agree on anything.  Just the mechanics 
get difficult. 

 3.  You cannot trust your competitors to restrain their output even if they say 
they will do it.  It is easy to say `Let's everyone put just a little on the 
local market', but  each firm would do better to put 150 on the local market 
after saying that. 

 4. One major  feature  of the  U.S. antitrust laws, which restrict monopoly 
behavior and cartels, is that they make open discussion among firms illegal  and 
they prevent firms from making legal contracts with each other to split up 
markets and restrain output.  Even if no firm is ever punished, the laws could 
be having a strong effect, by driving all the price-fixing agreements 
underground. 

 5.  When there are only 5 firms in an industry, if they can discuss policy 
jointly, they may be able to reach agreement, especially if they can make a 
legally binding agreement on outputs. The next to last month had open 
discussion, and in the last month, by handing in one card, the firms were in a 
cartel.  

 When I've used this game before, the 5 firms have never managed to cooperate 
under open discussion. Sometimes they have when binding agreements are possible, 
but even then sometimes 1 firm will refuse to join the cartel, which can break 
the cartel up entirely. 

    6. Businesses find it very important to forecast prices. Part of this is 
estimating demand, but this exercise shows that part of it is estimating supply 
too.